Are ITM Power shares a good investment? Here’s what I think
- The renewable energy market size is expected to reach $1.97trn by 2030.
- ITM Power’s Electrolyser technology has a competitive advantage.
- The company completed the world’s first electrolyte Gigafactory.
Could ITM Power (LSE:ITM) shares ride with the global journey towards net-zero? Net-zero has been a buzzword used by companies, policymakers, governments, and international organisations. In the world’s drive towards controlling climate change, businesses and governments worldwide are turning to renewable energy as a more sustainable energy source.
In my opinion, ITM Power has positioned itself to benefit from the push toward renewable energy, but does that make its shares a good investment?
The Business model
The firm is engaged in designing and manufacturing integrated hydrogen energy systems based on Proton Exchange Membrane (PEM) electrolyser technology. And it offers a product that is scalable above 100MW in size.
The electrolyser technology can extract hydrogen from water with no greenhouse gas emissions. So, it’s not surprising that it’s globally recognised as an expert. The group’s mission is to help directly feed clean, renewable energy into the power grid through its green hydrogen through three primary channels:
- Power to Gas
- Clean Fuels
- and Industrial Hydrogen.
The demand for ITM Power’s electrolyser technology has grown tremendously over the years. Needless to say, the market is poised to grow further with the 2050 deadline set by most organisations and governments for a net-zero economy.
The company generates revenue through the following means.
- Selling of the PEM electrolyser systems
- Consulting contracts
- Maintenance contracts
- and Selling of fuels and other products.
So, how have ITM Power shares performed?
Historical stock performance
The renewable energy sector has suffered heavily since the start of the Covid-19 pandemic. ITM power shares are no exception, as the stock has not delivered the best returns in the last few months. Today, the stock trades at around 350p. But it was only January 2021 since they were priced well-above 700p. Since the start of 2022, the stock is down around 13%, and over the last 12 months, the loss gets even worse at 24%.
But zooming out, shares have actually increased more than 1,800% in the last five years! So, is the recent tumble a buying opportunity for my portfolio?
The bull case for the ITM Power shares
It’s worth noting that ITM Power has been quite busy recently. Here are some of the recent developments within the company;
- The group had the first full year of its strategic partnership with Linde. The partnership allows ITM Power to focus exclusively on the manufacture of electrolysis equipment for large scale systems.
- It completed the world’s first electrolyte Gigafactory. By the end of 2023, the factory is expected to produce 1,000MW per annum.
- ITM completed the installation of the 10MW REFHYNE I project with expansion by 100MW planned for REFHYNE II at Shell’s Rhineland refinery.
- It sold the world’s largest PEM electrolyser to Linde.
- The company also sold the first MW-scale electrolyser to Sumitomo to be deployed in Japan.
Aside from the above, the firm equally received rounds of funding to expand its works. While this has not yielded instant results, I see it as ITM making enough statements in preparation for future demands for ITM’s electrolyser technology. Interestingly, the renewable energy market size is expected to reach $1.97trn by 2030. Needless to say, ITM Power shares could explode as the business generates more revenue and subsequently becomes profitable.
As encouraging as the group’s progress has been, it’s not without its risks. It remains entirely possible that another disruptive alternative energy technology could emerge that could render the group’s PEM electrolysers obsolete.
But even if that’s not the case, the firm’s valuation is currently being driven by expectations of future performance rather than underlying fundamentals. Management does have a good chunk of contracts being negotiated that could deliver on these expectations. But there is no guarantee that it will lead to revenue, especially if competitors come in to try and take advantage of the group’s sizable order backlog.
In this scenario, I wouldn’t be surprised to see ITM Power shares endure quite a sharp drop.
Should I buy ITM Power shares?
Considering that the company has a competitive advantage with its proprietary technology, I see the stock as a good investment. I will admit the valuation is pretty rich. But given the long-term market opportunity, I’m considering opening a small position within my portfolio today.
Learn more about ITM Power
- The ITM Power share price has crashed. Time to invest?
- Hydrogen vs Electric vehicles: The battle for supremacy
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Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.